索尼 (SONY) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Sony Corporation Q2 fiscal year 2010 financial results conference call.

At this time, all participants are in listen only mode.

We will be facilitating a question and answer session towards the end of this conference, at which time you may press *1 to participate.

(Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today's call, to Sam Levenson, Senior Vice President Investor Relations of Sony Corporation of America.

You may proceed.

Thank you very much for that introduction, Frances, and thank you all for joining us today, October 29, 2010, for the discussion of Sony's second quarter results.

I am Sam Levenson, Senior Vice President of Investor Relations at Sony Corporation of America.

With me on the conference call tonight is Mark Kato, CFO of Sony Corporation, Robert Wiesenthal, Group Executive, Corporate Development and M&A for Sony Corporation and EVP and CFO of Sony Corporation of America; and Gen Tsuchikawa, Senior General Manager of the Investor Relations Division.

Thank you all very much for joining us.

In just a few moments we will review today's announcement and then we'll be available to answer your questions.

Please be aware that statements made during the following remarks and Q&A session with respect to Sony's current plans, estimates, strategies, press release and other statements that are not historical facts, are forward-looking statements about the future performance of Sony.

These statements are based on management's assumptions in light of the information currently available to it, and, therefore, you should not place undue reliance on them.

Sony cautions you that a number of important factors could cause actual results to differ materially from those discussed in the forward-looking statements.

For additional information as to risks and uncertainties, as well as other factors that could cause actual results to differ, please refer to today's press release, which can be accessed by visiting, www.Sony.net/IR.

Let me remind you that a webcast replay of the investor meeting held earlier today, along with the slides presented at that meeting, and our detailed earnings release, are available on our website for your access.

With that, let me turn to today's announcement.

The results for the second quarter and our upwardly revised earnings forecast for the full fiscal year are reflective of the strong operational turnaround that the Company is experiencing.

Unlike a year ago, when the bulk of our earnings and our earnings growth came from the Financial Services businesses, we are experiencing expanding margins in our core businesses, with substantial improvement in particular this past quarter sfrom both game and Vaio.

In fact, this was the was the fourth consecutive quarter that the game business has been profitable, and the third consecutive quarter that Sony Ericsson has been profitable.

As a result, we are on track to achieve a JPY170 billion year-over-year improvement in operating profit.

The recent successes of innovative hit products, as well as building momentum in new products, is helping us to achieve this success.

For example, Sony Ericsson's Xperia X10 smartphone achieved 21% market share shortly after its launch in Japan.

Our new NEX-3 and NEX-5 cameras, with interchangeable lenses, have met with great success.

And the recent launch of both Sony Internet TV, powered by Google TV, and the PlayStation move, are both off to a very strong start.

Similarly, our entertainment businesses continue to generate earnings in line with our plans, and we have a very strong pipeline of upcoming movies and music in the next six months.

In addition, the video game pipeline has a number of major titles, including Gran Turismo 5, LittleBigPlanet 2, Killzone 3.

Clearly, challenges remain.

Certain geographies such as the US and Europe, certain products such as the TV category, and obviously, foreign exchange rates, are creating a strong headwind for us.

Given this, we have a very cautious view on the second half of the fiscal year, but despite that, we've raised our full year operating profit forecast to JPY200 billion, to reflect the strength of the results achieved in the second quarter.

So let's discuss those results in more detail.

Consolidated sales for the quarter increased 4%.

On a local currency basis, sales increased 13%.

Consolidated income of JPY68.7 billion was recorded, an improvement of JPY101.2 billion compared to the same quarter of the previous fiscal year, primarily due to improvements in operating results in the network box and services segment.

Net income attributable to Sony shareholders was JPY31.1 billion, an improvement of JPY57.5 billion compared to the same quarter of the previous fiscal year.

On a segment by segment basis, let's start with the Consumer, Professional and Devices segment.

Sales increased 1%, and sales to outside customers increased 3%, primarily due to an increase in LCD TV sales brought on by an increase in units.

Operating income increased primarily due to an increase in gross profit, resulting from the sales increase, an improvement in the cost of sales ratio, and a decrease in restructuring charges.

SG&A expenses increased, due to aggressive advertising and promotion efforts designed to support our strong product lineup.

Excluding the impact of restructuring charges, the product categories with improved results included Professional Solutions, which benefited from higher sales of primarily digital cinema projectors and broadcast and professional equipment for HD production, and semiconductors, which benefited from an increase in sales of image sensors.

Television business sales increased 15%, to (technical difficulty), due to an approximately (technical difficulty) increase in unit sales year on year, to 4.9 million units.

Excluding restructuring charges, JPY16 billion in operating loss was recorded, a deterioration of JPY5 billion versus the same quarter of the previous fiscal year.

This is due to a significant drop in sales prices, despite a continued reduction in cost and our efforts at cost improvement.

Compact digital camera sales decreased slightly, primarily due to price declines and the negative impact of foreign exchange rates, although unit sales increased significantly year on year.

Operating income decreased as price declines, currency and aggressive investment in sales promotion designed to expand the business offset the benefits from volume increases and cost reductions.

Video camera sales and profit decreased due to the negative impact of foreign exchange rates and unit sales declines, but operating profit margin was basically flat due to cost reduction.

Turning next to the Networked Products and Services segment, sales increased 5% primarily due to an increase in PC sales.

Operating results improved significantly year on year, due to a significant improvement in the cost of sales ratio, and an increase in gross profit from higher sales, although exchange rates had a negative impact.

Excluding the impact of restructuring charges, categories with improved results included game, which benefited from increased sales and significant improvements in the cost of the PS3, NPCs, which had higher unit sales.

Game sales decreased 13% year on year to JPY171 billion.

This was primarily due to a decrease in unit sales of PSP hardware and PS2 software, although PS3 hardware and software sales were strong.

Operating results improved JPY54 billion year on year, to a JPY13 billion profit.

This significant improvement resulted from the PS3 hardware cost reductions, and an increase in unit sales of PS3 software despite the negative impact of exchange rates.

As I mentioned earlier, the game business has been profitable for four consecutive quarters.

PS3 hardware sales units were 3.5 million [year] units, more than 3.2 million recorded in the same quarter last year when the new PS3 model was introduced.

This was driven by an introduction of hit software titles.

We're on track to reach our target of 15 million units for the year.

With the launch of the PlayStation Move in September, and other actions, momentum is growing for the year-end selling season.

PC sales increased and market share increased in all regions, resulting from an enhanced product lineup.

Operating results improved primarily due to the unit sales increase, although prices declined.

Turning next to Pictures.

In Pictures, sales increased 6%, and operating results improved.

Theatrical revenue increased significantly due to the strong performance of the film slate, including Salt and Resident Evil Afterlife.

Operating results improved primarily due to the strong motion picture sales, and an increase in revenue from television channels outside of the United States.

Sales in the music segment decreased 11%, and operating income decreased slightly.

The decrease in sales was primarily due to the strong sales of Michael Jackson catalog products in the same quarter of the previous year.

The contraction of the physical music market and the appreciation of the yen were also reasons for the decrease in sales.

The decrease in profit resulted from the decrease in sales.

Next is Financial Services.

Financial Services revenue increased 10%, and operating income increased significantly.

The increase in revenue was primarily due to gains on sales of securities, and an increase in insurance premium revenue at Sony Life.

The significant increase in operating income was primarily due to an increase in net gains on sales of securities.

Sales at our equity affiliate Sony Ericsson decreased 1%.

There was a significant rise in the average selling price, resulting from a mix shift brought on by an increase in smartphones, but unit sales of mobile phones decreased as a result of streamlining the product portfolio.

However, income before income taxes improved significantly due to the benefit of cost reductions and the favorable impact of the mix shift.

As a result, Sony recorded equity net income for Sony Ericsson of JPY2.6 billion for the quarter, compared to a loss of JPY10.9 billion in the same quarter last year.

That's three consecutive quarters of profit for Sony Ericsson.

Finally, let's review the revised sales and earnings forecast.

On the top line, we're reducing our sales and revenue forecast from JPY7.6 trillion to JPY7.4 trillion for the year.

This results in revised foreign exchange rate assumptions to account for the appreciation of the yen.

Our yen to US dollar exchange rate assumption for the second half of the fiscal year moves from approximately JPY90 to approximately JPY83.

There is no change to our yen to euro assumption of approximately JPY110.

Our operating profit forecast has been raised from JPY180 billion to JPY200 billion, primarily as a result of the strong results achieved during the second quarter.

On a segment basis, we've raised our estimate for Network Products and Services, primarily due to the strong results from game and PCs, and lowered our expectations for Consumer, Professional and Devices, mainly due to the impact of the updated foreign exchange rate assumption, and deterioration of North American LCD TV market.

Our operating profit forecast for the other segments have not changed materially.

At this time, we'd be pleased to take your questions.

Thank you.

(Operator instructions) Our first question is from the line of Daniel Ernst with Hudson Square Research.

You may proceed.

Good evening.

Thank you for taking my call.

I have a couple of questions on game, and a couple of questions on the TV side.

First, on the game profitability, what, if any, was the contribution from reversal of prior periods' inventory charges?

And then, secondly, can you comment on the sales of the new Move motion controller?

And then, on the TV side, given the deterioration in sales here in North America, what gives you the confidence to maintain the overall forecast for 25 million units globally?

And then, can you comment on the reception, or proportion of sales coming from 3D televisions?

And finally, could you comment on the recent moves by the US broadcast networks to block access to the video sites from the Sony Internet powered Google TV?

Thank you.

OK, I will start with gaming PS3.

There are no inventory charges affecting the profitability of PS3 in the second quarter.

Costs have come down -- I mean, the negative margins on the hardware have been eliminated since last April.

So we're in the mode of making money on each unit we sell at the moment.

So the profitability, with a combination of reduced cost on the PS3, quite impressive sales on the software of PS3, and reduction in SG&A.

On the TV side, 25 million -- well, I think a lot depends on how we do in the third quarter, which includes the holiday season.

Now if you look at the position on a global basis, I think it's a different picture, region by region.

If you take the emerging markets -- Brazil, Russia, India, China -- they're all doing double digit growth in the TV area, at least for our business.

If you look at Japan, sales is booming in TV, because we have this government subsidy in place, and you can get a refund for certain categories of TV that you buy.

So that, excluding those areas, if you look at North America, it is a little bit troublesome in that sell through for the past several months has been below -- well, last year's level, and we see some slight buildup of inventory.

So that's one soft spot we have.

All in all, we are still aiming to do 25 million, but a lot depends on third quarter.

Just to add a little bit on gaming, we've sold 2.5 million of Move machines in the US and Europe, and the momentum continues to be very strong.

Yes.

On 3D, our expectations at the beginning of the year was to do about 10% of our sales.

Well, I think it's quite early days, but so far, our forecast seems to be a little bit high in that it's a little bit below expectations.

But I think we have to wait for good software catalog to be available for the consumers, to really measure what 3D can do for us.

It's Rob Wiesenthal.

Question about Google TV and some efforts to block certain content from appearing over the set.

We -- as you know, we recently launched the TV.

It's been very successful in terms of a launch, both in terms of the standalone television set, and the Google Blu-Ray player.

It is very difficult to manage access on these IPTVs with respect to network content.

Because of browser capability, there's lots of places where users can go to access various content.

But the networks earn significant fees from the conventional distributors, and it's incumbent upon the content companies to find ways to monetize their content.

And both the content companies that are working closely with Google and other providers of IPTV services is to explore new models, and these things are starting to happen.

Whether you look at our own Qriocity, NetFlix, Hulu, everybody's experimenting, and everyone's working really hard to come up with business models so that all the participants can earn money and consumers can get access to their content.

Okay, thank you.

And just one follow-up question on the 3D that you mentioned, that software would be a helpful component on that.

Rob, do you have a sense of what the pipeline looks like for 3D Blu-Ray, because there doesn't seem to be a lot in the market today.

Well, I guess what I'll say is, more and more studios, obviously, are planning what we call high quality 3D content, because it is clear that consumers will respond in force with their -- opening their pocketbooks and their wallets for quality 3D content.

The first quarter next year, we hope to launch our 3D network, which is a joint venture with Discovery and IMAX.

They are already actively producing 3D content.

And with respect to upcoming releases, there -- we have a number of films that are coming out that are 3D from the launch.

On Blu-Ray, Cloudy with a Chance of Meatballs has already come out.

That was our first release in terms of the pipeline.

Green Hornet will be in on 3D.

And with respect to the rest of the year, there probably will be four or five Blu-Ray 3D titles that will be out by the end of the year.

So it's starting to happen.

The penetration is coming, in terms of these sets.

I think you'll soon see 3D will be more of a feature on the television set, as opposed to having the nomenclature of a 3D set alone, and I think the price will be more and more attractive to the consumer as the months go on.

So I think we're optimistic, but you're right -- the content has to get there, and luckily, there's a lot of interest in the content producers to come out with that quality content.

Excellent.

Thank you much for the answers.

Your next question is from the line of Kaito Arosawa from Citigroup.

You may proceed.

Hi, gentlemen, good evening.

I have a question on the digital camera space, which had been highlighted in the presentation today.

I see a full HD movie function is becoming more common, if we believe Alpha 55 will be a big hit.

And also, your Cyber-shot product lines also have a full HD movie capability.

So the question is, do you think this is the key, or the full HD movie function, would be the key for the critical differentiation against, say, digital SLR giants like Canon or Nikon?

I'd like to ask you the Sony target for the next year Cyber-shot, Alpha series, or NEX, with a market share operating margin direction, maybe.

And also, I'll appreciate if you can mention operating margin range for those camera products in the second quarter actual, and the second half Company's estimate.

And then I have a follow-up question.

Thank you.

Arosawa-san, I cannot talk about product strategy.

But let me explain it in this way.

Now, full HD on cameras, it is an important feature, but I think everybody is doing it.

Now -- so it's becoming a common standard feature.

I think it -- how we could apply our technology to make the best high quality offering in this area.

Obviously, you know that we are -- we do have our camcorder business.

We have been in this business for -- well, since the industry started.

Now, what we are doing is that we have organizationally, we have combined the camcorder group with the high end camera group, so that we have a seamless strategy between still pictures and camcorder function.

So I cannot talk about specific products, but what will come out of this combination of technology, I think we have a track record, and hopefully that track record would indicate that we will come up with something very exciting.

Okay, thank you.

Maybe I could ask --

Maybe if I could add one point.

I think the strength of our digital imaging business is coming from the very strong co-working relationship between the semiconductor group and visual imaging group.

So historically, both groups used to work independently and have their own road maps, and they did not come together too well.

But as you know, our [image tester] groups makes the most competitive image sensors in the industry, the most innovative, and most effective.

And the success of the NEX camera came from the fact that the product concept -- to meet the product concept, the semiconductor group worked to make appropriate image sensors that would fit the camera, and at a very fast time to market.

And I think this is what we will continue to do to differentiate ourselves in the marketplace.

Okay, just -- this --

To add a few words to that, the camera business, for us, it was what you call a vertically integrated business model, in that we have our image sensors produced in-house.

We have our signal processors produced in house.

And in the future, we may have optics, the lenses also, in-house.

Now, with the combination, see, I think we can do a lot of things that -- for -- no, to compete against manufacturers, are in this business doing kind of a horizontal sharing of resources.

I think here is one strength that Gen mentioned.

Just added a little bit more to what he mentioned.

Okay, thank you.

Do you see any better numbers, operating margin or market share numbers in the coming quarters in digital imaging because of these new features, which I think the Sony is running ahead of others?

So is there any brighter point in the coming futures, please?

Well, in the past, single lens reflexes, we started out with a bang with the Alpha series, but after that, our market share worldwide -- well, it depends on country, but on average, below 10%.

Now, with the introduction of the NEX-5 and NEX-3 and Alpha 55, our market share is now -- well, again, it depends on the country and the supply we can provide, and high countries, market share is close to 30%.

So I -- we intend to -- we hope to continue this trend, because both cameras, I think, are opening up new applications, consumers, who in the past would not come into the digital SLR market.

I think our NEX series are attracting a lot of female consumers and I hope this translates into higher market share and better profit margins for Alpha series business overall.

I cannot give you a number, but very positive business for us.

Okay, thank you.

I'm afraid I'm taking a bit long time, but I have one more question here.

Is it -- this is about Google TV.

Is it correct to say Google TV is compromising hardware margin -- I mean, the TV hardware margin, in order to increase installed base, to grab more sales opportunity in the network business?

No, I don't think that's fair.

Obviously, there's a curve of any innovative new television set in terms of profitability.

However, we think there's upside here, because for the first time, Sony will be able to generate revenues from a consumer, past the point of purchase of the television, with -- not only content, but targeted marketing, sponsorship, and other services and even casual gaming, which is something that we've never been able to do with a consumer, a television consumer before.

Okay, thank you for the answer.

Your next question is from the line of Yuji Fujimori with Barclays Capital.

You may proceed.

Yes, thank you very much for taking my questions.

The first question is the regional performance.

Tokyo results briefing meeting, Kato-san commented BRIC's revenue was up 30% year on year in Q2, and I'm curious, how about -- and the profitability or profit contribution by region?

That's the first question.

And secondly, in terms of TV, the TV operation was a little bit disappointed in Q2, and that's why I want to ask about the inventory conditions, not just the Sony, but also the -- as an industry situation.

And also, in Q3 and Q4, what kind of magnitude do you have already factored in, in terms of the potential risks about the volume shortfall or price competition?

Profitability in the BRIC countries are -- well, I cannot give you numbers specifically by product line, by country, but just to give you a flavor of what I meant, I think the -- comparatively speaking, the big market, United States and Europe, huge volume numbers, but because everybody's in that market, very severe price competition.

That's one reason why the profitability in North America is not as good.

Now, if you would, other areas are -- I mean, it is not as tough as the US market, for one thing, in terms of competition.

Now, the other thing is -- factor that is playing here is exchange rates in those emerging countries.

Typically, the exchange rates for local currencies, compared to the dollar, is relatively high at the moment, and that is helping us when we count it -- our peanuts.

You know, in translating to yen.

It's giving us some cushion at the moment.

Rob Wiesenthal.

Let me give you a little bit more picture in terms of our Consumer Electronics sales.

I'll discuss it on a local currency basis, because that gives you a better picture.

Basically, this year, compared to the previous year, sales is growing somewhere around 20%.

And the most growing area is the emerging markets.

That's approximately 30% to 40% of our sales, and that's growing at roughly 30%.

The second most growing part is Japan with the Eco-point, and that is roughly somewhere around 15% of our sales.

And in the second quarter, it grew close to 20%, but as you can see, that's going to go higher when it gets into the Christmas season.

And US and Europe is the rest, and they are all both showing positive growth, so that gives you approximately 20% number.

Second point.

When you start looking at average ASPs of what we are selling in the emerging markets, it is not -- it comparable to what we are doing, what we are achieving in the more established countries.

Actually, ASPs in digital cameras in China is actually one of the highest.

That's one example.

On the TV side, okay, to elaborate a little further on what I mentioned this afternoon at the analysts' meeting.

Again, what I said was that we are aiming to -- or prepared to do whatever we need to reach the objective, namely, 25 million TV sets for the fiscal year.

Now, would we do it at the expense of our bottom line?

There is an extent of how much we will -- we are prepared to lose money, but this year, we have a better product lineup.

This year, we need to regain the market share that we lost last year.

So to continue this business into -- for years to come.

So what I said was, we are to prepare to spend the money on marketing.

Sometimes it may translate into aggressive pricing, but between the two, we are prepared to spend the money as necessary.

That, in turn, translates into the very, I would say, conservative outlook on profitability on TV, and our business in general for the second half.

Sorry I cannot give you a specific number, how much we have for advertising and promotion, but I think you can get the flavor of what I meant.

Okay, thank you very much.

If you have any color on the inventory side for TV business, could you give me any sense?

Okay.

The market inventory, I think -- and this is no secret.

Sell through for the past several weeks, months, has been below last year.

And not naming any specific company, trade inventory is rather heavy at the moment.

That is one reason I think we need to be prepared for another very competitive market going into the Christmas season.

Okay.

Thank you very much.

Your next question is from the line of Mark Harding from Maxim Group.

You may proceed.

Okay, thank you very much.

I just wanted to sort of follow up on the TV side.

The -- it seems as though prior, that ASPs were down a little bit more year-over-year than the industry.

And I was just wondering why, given that the product lineup is more competitive.

There is that delta between Sony ASP declines and the industry.

Okay, let me put it this way.

The year on year decline in our ASP being, as you said, higher than industry, this is partly because our prices last year were high.

You may recall that last year, product-wise, we were not in a very good position to compete.

LED backlit TVs, you heard the story many times.

Cost structure, again, although improving over time, not an ideal situation.

So last year, our strategy was to -- was not to pursue share or numbers, sales.

So we held our projections at 15 million, stuck to it, and tried to balance profitability and market share.

So we held prices pretty high.

But this year, with the better product lineup, and the intention to move as much product as we can to regain momentum and market share, year on year, that resulted in a higher drop in average selling price for our business.

Okay, fair enough.

One additional point?

Yes.

One additional point is that we, looking at the China market, we introduced some very low end affordable TVs focused on -- to penetrate more on the China market, which we call the BX model.

It started out 32" and [29991].

And so, those types -- the share of those types of model increasing pushed -- naturally, pushed down the ASP.

Okay, fair enough.

Can you give any sort of metrics about Qriocity adoption, and perhaps how this strategy fits with content through Google TV, or for that matter, the NetFlix integration?

We can't give you numbers on Qriocity.

But what I will tell you is, Qriocity is optimized to perform on Sony devices, whereas a lot of other services has been a multitude of devices.

Qriocity is optimized to -- has the best experience for the user on a Sony device.

Additionally, because of our ownership of content, both with Sony Pictures and Sony Music and even PlayStation, the hope is to offer unique experiences to our consumers that you can't find anywhere else.

But we are seeing a wide range of usage by our consumers on connected Blu-Ray players and televisions.

That's for all services, including Qriocity, NetFlix , and

Okay.

And then, just lastly, I wanted to touch on a few questions from the Tokyo call, I guess specifically relating to the product roadmap for PSP and mobile gaming as well as tablets.

I mean, I guess, given that most PC companies are coming out with tablets, and PSP is really starting to show its age at this point, how are you handling the product roadmap?

Or perhaps, I guess, put another way, is there a sense of urgency to accelerate product development and sort of time to market to compete more effectively with some of these non-traditional competitors like Apple?

Well, I don't think we can discuss specific products or features at this conference call.

Mobile gaming is a very important business area for us.

We started out with the PSP -- that was our first mobile gaming console.

But since then, the market, as you know, has expanded into bigger arenas, in that gaming on mobile phones, gaming on tablets, gaming on all sorts of mobile devices.

Now, PSP being a proprietary platform, it was more concentrated on, I would say, core gaming segment, rather than the light gamer.

But now we are addressing that market as well.

I cannot be specific as to how we will introduce new product to address this market, but one thing I can say is that we have those markets addressed, and we will come out with product and services to capture the broader gaming market.

I know this is not going to be a clear cut answer, but please wait until we are ready to announce whatever product or services that we may come up with.

Okay, fair enough.

In addition to our strength in, obviously, in the hardware, the strength, obviously, we have strength around our gaming business, having our own gaming content.

We have our -- the network services.

And also, we have many, many, many different types of devices and the interconnectivity between the devices certainly helps our business proposition be more interesting to the consumer.

And that's what we're trying to do.

Okay, fair enough.

Thank you very much.

At this time, there are no other questions in the queue.

I'd like to turn the call over to Sam Levenson for closing remarks.

I'd like to thank everybody for joining us this evening from Tokyo and all around the world.

Any follow-up questions you may have, please feel free to call our Investor Relations officers in London, New York, and Tokyo.

Thank you, and good night.

And ladies and gentlemen, thank you all for your participation in today's conference call.

This concludes the presentation and you may disconnect.